Forex Margin: Learning Forex Basics

This time around, we take a look at forex margin.  This is something that is less associated with the trade values and more closely related to the activity itself – that is, the use of the forex.  This margin is generalized according to two types: used and free.  Used margin means money from your account that is being used to hold a trade position open.  Free margin is the money in your account that is available for use in various trades.  Simply put, margin is the deposit you need to open or maintain positions.

The margin can vary according to the broker you trade with.  Some brokers have 1% margin requirement for trades, others can have it as high as 50%.  With a margin requirement of 1%, you can open trades up to 100 times the value of your deposit.  This feature magnifies your ability to make profits, but also multiplies the risks of loss by an equal amount.

When your account falls below the forex margin required to hold positions open, you will receive a margin call.  This call allows you to either add more money into your account so you can keep trading, or to close the open position.  Many brokers close positions automatically as soon as your margin balance falls below the requirement, to prevent too much loss on your part.

Be very careful when using low forex margin requirements to your advantage.  They are double-edged swords!  On one hand, you can open big positions with relatively little money, but on the other hand you can easily lose all that money and more due to a bad call.  Remember that this is similar to high-stakes gambling – big gains are awaiting and so are major losses.  Temper your greed with prudence, but know when to be aggressive with your trades.